2 Non Sequitur by Wiley Miller 4/1/2017Non Sequitur by Wiley Miller
3 MARKETS Institution that brings together buyers (DEMAND) 4/1/2017MARKETSInstitution that brings togetherbuyers (DEMAND)and sellers (SUPPLY) of resources, goods and services
4 4/1/2017DEMAND isAmount of a good or service consumers are willing and able to buyMajor determinant of demand is PRICEAmount of demand at each price is quantityQuantity of demand at each price is shown in a “Demand Schedule”
7 DEMAND CURVE P is the vertical axis Qty of D is the horizontal axis 4/1/2017DEMAND CURVEP is the vertical axisQty of D is the horizontal axisDemand Curve is downward sloping because:Common sense (lower price = buy more)Diminishing marginal utility (the more consumers buy, the less satisfaction they receive)Income & Substitution Effects
8 4/1/2017INCOME & SUBSTITUTIONIncome Effect – the lower price increases the purchasing power of consumer’sSubstitution Effect – lower price gives incentive to “substitute” this item for those that are relatively more expensive
9 Diminishing marginal utility : 4/1/2017Diminishing marginal utility :Consuming successive units of a particular product yields less and less extra satisfaction – consumers will only buy additional units if the price is lowered. ( the more consumers buy, the less satisfaction they receive)
10 LAW OF DEMAND Demand varies inversely with price 4/1/2017LAW OF DEMANDDemand varies inversely with priceIf Price goes up – Demand goes downEx: luxury carsIf Price goes down – Demand goes up- Ex: clearance sale
11 NON-PRICE DETERMINANTS 4/1/2017NON-PRICE DETERMINANTSPREFERENCES – based on popularity or trends by consumersINCOME EFFECT – how much money consumers have available to spendPOPULATION CHANGES – how many consumers are in this marketEXPECTATIONS OF CONSUMERS – what consumers think will happen in the future that affects their actions NOW!!CONSUMERS TASTES & PREFERENCES: OUR TASTES & PREFERENCES AS CONSUMERS ARE ALWAYS CHANGING WITH THE TIMES & EACH NEW GENERATION GIVE ME AN EXAMPLE OF A NAME BRAND? TOMMY HILFIGERTHE DEMAND IS HIGH NOW - ALTHOUGH DEMAND MIGHT CHANGE LATER (GOES W/FADS) EX. HULA HOOPS IN 50’S, PET ROCKS OF 60’S, BELLBOTTOMS OF 70’S, CABBAGE PATCH DOLLS OF 80’S, POWER RANGERS OF 90’S, ETC.POPULATION CHANGES: BABY BOOMERS (BIGGEST AGE GENERATION) WHY ARE THEY CALLED BABY BOOMERS? TIME OF PROSPERITY, WAR WAS OVER, PEOPLE STARTED HAVING BIG FAMILIES. SOON THESE BOOMERS ARE GETTING TO RETIREMENT AGE & STARTING TO RETIRE - WHAT’S GOING TO HAPPEN? HIGH DEMAND IN ROGAINE, NURSING HOMES, MEDICINE, RETIREMENT HOMES, GERITOL, INCONTINENCE, ETC. (AARP = 1 OF LARGEST ORGANIZED GROUP IN AMERICA)GERIATRICS WILL BE IN HIGH DEMAND FOR THIS HUGE POPULATION - MIGHT BE A CAREER OPTION.DIMINISHING MARGINAL UTILITY: SATISFACTION WILL DECREASE WITH EACH ADDITIONAL UNIT PURCHASED/CONSUMED. (E.G. MOWING YARDS & GLASS OF WATER) (PIZZA) REGARDLESS OF HOW SATISFYING THE FIRST TASTE IS, SATISFACTION DECLINES WITH ADDITIONAL CONSUMPTION.CONSUMER EXPECTATIONS: AS A CONSUMER - I MIGHT GO TO DILLARD’S OR FOLEY’S & FIND AN OUTFIT I LOVE - BUT I MIGHT KNOW HOW THE STORE WORKS & IT WILL PROBABLY GO ON SALE NEXT WEEK (RED APPLE) IF I AM EXPECTATING IT TO GO ON SALE, THEN WHAT WILL MY DEMAND BE NOW? DEMAND WILL BE DOWN NOW - IT HAS BEEN POSTPONED. WHAT HAPPENS IF I HEAR THE PRICE OF SOMETHING WILL GO UP SOON? IT WILL BE IN HIGH DEMAND NOW. (GAS PRICES)
12 NON-PRICE DETERMINANTS con’t. 4/1/2017NON-PRICE DETERMINANTS con’t.Elasticity of demand – how much demand changes to respond to changes in priceMore elastic when goods are luxuriesEx: steak, diamonds, SUVMore inelastic when good is neededEx: medicine (insulin), soap, milk
13 NON-PRICE DETERMINANTS con’t. 4/1/2017NON-PRICE DETERMINANTS con’t.Related GoodsSUBSTITUTION EFFECTAs price increases for a good, demand for its substitute (chicken for beef; generic) goes upCOMPLEMENTARY GOODSAs price goes down for one good, demand for that good & its complement both go upDVD player on sale but DVD bought for regular priceINCOME EFFECT: CHANGES IN INCOME WILL AFFECTDEMAND. IF YOU ARE FIRED OR LAID OFF FROM YOUR JOB, WHAT WILL HAPPEN TO DEMAND…IT WILL GO DOWN. HOWEVER, IF YOU WIN THE LOTTERY, WHAT WILL HAPPEN TO YOUR DEMAND…IT WILL GO UP.SUBSTITUTION EFFECT: WHAT IF I WAS THE MOTHER OF 10 CHILDREN ALL UNDER THE AGE OF 5? (THINK MULTIPLE BIRTHS) WHAT ARE ALL THESE CHILDREN GOING TO NEED ? AMONG OTHER THINGS, MILK WHAT IS THE PRICE PER GALLON RIGHT NOW? $2.79 WHAT IF THE PRICE PER GALLON GOES UP TO $ MY KIDS NEED CALCIUM FROM THE MILK - DO I HAVE ALTERNATIVES?-POWDERED MILK, VITAMINS, CANNED MILKDEMAND WILL LOOK TO SUBSTITUTES, GENERICSCOMPLEMENTARY GOODS: ITEMS USED TOGETHER. A CHANGE IN PRICE ON 1 GOOD CAN HAVE AN AFFECT ON THE DEMAND FOR BOTH GOODS. (HOTDOGS & BUNS, COFFEE & FILTERS
14 NON-PRICE DETERMINANTS 4/1/2017NON-PRICE DETERMINANTSREMINDER: “P I P E E R”Preference of consumers (popularity)Income of consumers ($$ to spend)Population (# of consumers)Expectations for future (what to do NOW?)Elasticity (effect of price)Related Goodssubstitute available?price of complementary good changes- demand for both changes?
15 A little more on consumer expectations 4/1/2017A little more on consumer expectations1. Expect P to go up in the future = D>now2. Expect P to down in the future = D< now3. Expect income to > in near future = D > now4. Expect income to < in near future = D < nowExample: The news announces that the P ofCD players will < next week. What does D do?
16 Substitutes (+ relationship) 4/1/2017Substitutes (+ relationship)If the P of steak >, then the d for chick >If the P of steak <, then the d for chick <Pepsi for Coke…………………..
17 Complementary goods: inverse relationship 4/1/2017Complementary goods: inverse relationshipIf the price of flashlights goes up, then the Demand of batteries goes down.If the price of flashlights decreases, then the D for batteries_______?
18 Be wary of independent goods. They have no effect on one another 4/1/2017Be wary of independent goods. They have no effect on one anotherLike Chinese food and chocolate puddin
19 Hurry Lads – to the white boards! 4/1/2017Hurry Lads – to the white boards!
20 4/1/2017Change in QD – caused by a CH in the P of the product under consideration now. 1. shown by moving from one point to another along a stable/fixed demand curve Caused by a change in the P of the product 3. The P of T-shirts >, :. QD <
21 4/1/2017Change in DCaused by a CH in one or more of the non-price determinants of D(whats the acronym?)…………….1. The P of the product does not change now.2. Shown by shifting the Dcurve.D> shift to the rightD< shift to the left
22 Draw a DC based on the D schedule below these stupid words. 4/1/2017Draw a DC based on the D schedule below these stupid words.20oz Red BullCans of 20oz Red Bull$ 1.753$ 1.505$ 1.257$ 1.0010$ 0.7515$ 0.5020$ 0.2525
23 What do you do with D if the price moves from $.50 to $1.50? 4/1/2017What do you do with D if the price moves from $.50 to $1.50?
24 4/1/2017A news report has just surfaced that energy drinks will make you smarter, better looking and smell like sunshine.
25 4/1/2017Three 4 year old kids drank Red Bull last night and tweeked so hard that they brains froze up like the laptops at Guyer.
26 20 oz Red Bull is selling for $2.00 per can. 4/1/201720 oz Red Bull is selling for $2.00 per can.The price of Monster just dropped to 1.00 per 20oz can.
27 4/1/2017SUPPLY isAmount of a good or service producers are willing and able to sellMajor determinant of supply is PRICEAmount of supply at each price is quantityAmount of supply at each price is shown in a “Supply Schedule”
30 SUPPLY CURVE Price is the vertical axis 4/1/2017SUPPLY CURVEPrice is the vertical axisQty of supply is the horizontal axisSupply Curve is upward sloping because:Price and quantity supplied have a direct relationPrice is an incentive to the producer as they receive more revenue when more is sold
31 LAW OF SUPPLY Supply varies directly with price 4/1/2017LAW OF SUPPLYSupply varies directly with priceIf Price goes up – Supply goes upIf Price goes down – Supply goes down
32 NON-PRICE DETERMINANTS 4/1/2017NON-PRICE DETERMINANTSCost of ProductionCost of producing goods & servicesEx: minimum wage for labor goes upEx: Natural disasters make costs go upExpectations of producersPredictions on how consumers will actResources that can be used to produce different goodsCorn instead of wheatCOST OF PRODUCTION (PRICE OF INPUTS): IF THE COST OF YOUR RESOURCES CHANGES, IT MIGHT HAVE AN AFFECT ON YOUR SUPPLY.IF MINIMUM WAGE GOES UP ANOTHER $1.00 AN HOUR, THEN I HAVE TO PAY MY WORKERS MORE, WHAT IS GOING TO HAPPEN? I WON’T BE ABLE TO EMPLOY AS MANY WORKERS - MY PRODUCTION AMOUNT WON’T CHANGE, BUT MY COST OF PRODUCTION HAS INCREASED.TECHNOLOGY: A TECHNOLOGICAL BREAKTHROUGH WILL HELP YOU PRODUCE MORE EFFICIENTLY (1 OF NATIONAL GOALS) WHAT WILL HAPPEN TO THE SUPPLY CURVE? IF THERE IS AN INCREASE IN ROBOTICS & I STARTED USING THEM IN MY PLANTS - MY SUPPLY WOULD INCREASE - BECAUSE I CAN MAKE A LOT MORE FOR ALMOST THE SAME AMOUNT OF MONEY. (LONG TERM EFFECT IT WILL SAVE YOU MONEY)TAXES: TAXES CAN HAVE AN AFFECT ON HOW MUCH WE SUPPLY (TIME OF YEAR LIKE TAX SEASON) IF GOVERNMENT HAS DECIDED TO RAISE MY TAXES - WHAT WILL HAPPEN? MY MIGHT HAVE TO GO DOWN BECAUSE I HAVE TO TAKE MONEY FROM MY CASH FLOW & PAY OFF THE GOVERNMENT ( LIKE A COST OF PRODUCTION)GOVERNMENT REGULATION: GOV’T. REGULATED BUSINESSES IN MANY WAYS. OSHA - HARD HATS. Who pays for those hard hats? Businesses Home Depot - back braces - safety precautions
33 NON-PRICE DETERMINANTS 4/1/2017NON-PRICE DETERMINANTSTechnologyImprovements increase productionTaxes/SubsidiesPay more tax which increases cost of productionGov pays firm to produceSuppliers (# of firms)REMINDER: “C E R T T/S S”NATURAL DISASTERS: THINGS LIKE HURRICANES, FLOODS, FOREST FIRES, TORANDOESIF YOU WERE IN A BUSINESS FOR SUPPLYING LUMBER, WOULD YOUR SUPPLY GO UP OR DOWN?GROCERY STORES, HOTELS, WATERCOMPETITION: THE NUMBER OF FIRMS IN COMPETITION WITH YOU MIGHT HAVE AN AFFECT ON YOUR SUPPLY.PRODUCER EXPECTATIONS: BUSINESSES/PRODUCERS TRY TO PREDICT HOW CONSUMERS WILL ACT AND TRY TO ADJUST THEIR SUPPLY.-RETAILERS EXPECTING A BIG SHOPPING SEASON AROUND CHRISTMAS WILL STOCK THEIR STORES WITH EXTRA MERCHANDISE.PRICE OF OTHER GOODS: WHEN CORN GOES UP IN PRICE - SUPPLIERS WILL SUPPLY MORE OF IT RATHER THAN CHEAPER PRICED GOODS (REMEMBER, SUPPLIERS ARE LOOKING FOR A PROFIT.) (CORN & WHEAT)
34 Book Version – page 48 Resource prices Technology Taxes and subsidies 4/1/2017Book Version – page 48Resource pricesTechnologyTaxes and subsidiesPrices of other goodsPrice expectationsNumber of sellers in the market
35 Shifts in Supply & Demand Curves 4/1/2017Shifts in Supply & Demand CurvesIncrease - shifts to the rightDecrease - shifts to the leftPRICEPRICED 1D 2D 2D 1QUANTITYQUANTITY
36 Shifts in Supply & Demand Curves 4/1/2017Shifts in Supply & Demand CurvesIncrease - shifts to the rightDecrease - shifts to the leftS2SSS2PRICEPRICEQUANTITY CHANGES AT EVERY PRICE, WHICH RESULTS IN A SHIFTREMEMBER: PRICE CHANGES QUANTITY DEMANDED AND QUANTITY SUPPLIED.QUANTITYQUANTITY
37 Effects of Changes in both S&D page 53 in the book 4/1/2017Effects of Changes in both S&D page 53 in the bookS D Eq P Eq Q> < < Indeterminate< > > Ind> > Ind >< < Ind <
38 EQUILIBRIUM PRICE Point where buyers and sellers are equally satisfied 4/1/2017EQUILIBRIUM PRICEPoint where buyers and sellers are equally satisfiedPoint where D & S curves intersectAdam Smith’s Invisible Hand TheoryForces of S & D, competition & price make societies use resources efficiently
40 Equilibrium When supply = demand, there is equilibrium in the market Equilibrium creates a single price and quantity for a good/service
41 Changes in equilibrium When supply or demand changes, the equilibrium price and quantity changeIf demand increases then price increases and quantity increasesIf demand decreases then price decreases and quantity decreasesIf supply increases then price decreases and quantity increasesIf supply decreases then price increases and quantity decreases
46 Simultaneous Changes in Supply and Demand If supply and demand both increase then price is indeterminate, but quantity definitely increasesIf supply and demand both decrease then price is indeterminate, but quantity definitely decreases
47 Simultaneous Increase in Supply & Demand Qqq1q2S & D .: P ? & Q ↑
48 Simultaneous Decrease in Supply & Demand Qq2q1qS & D .: P ? & Q↓
49 Simultaneous Changes in Supply and Demand If supply decreases while demand increases, then price definitely increases while quantity is indeterminateIf supply increases while demand decreases, then price definitely decreases while quantity is indeterminate
50 Decrease in Supply w/ Simultaneous Increase in Demand Qq1qS & D .: P↑ & Q ?
51 Increase in Supply w/ Simultaneous Decrease in Demand Qqq1S & D .: P↓ & Q?
52 DisequilibriumIf price occurs at some point where supply and demand are not =, then disequilibrium exists.If the price is higher than the equilibrium price, then a surplus (Qs>QD) occursIf the price is lower than the equilibrium price, then a shortage occurs (Qs<QD)
55 Causes of Disequilibrium Price floor – a minimum price for a good/service or resource determined outside of the marketEx. Minimum wagePrice ceiling – a maximum price for a good/service or resource determined outside of the marketEx. Concert tickets sold by Ticket-master
56 (ex. Minimum wage in competitive unskilled labor market) Effective Price Floor(ex. Minimum wage in competitive unskilled labor market)PSpmwpeDQqdqeqsIf price floor is effective, then qd < qs .: surplus labor exists
57 Effective Price Ceiling (ex. Single price for admission to a popular concert )PSpeptDqsqeqdQIf price ceiling is effective then qs < qd .: ticket shortage exists
58 SURPLUS Supply is greater than demand at this price 4/1/2017SURPLUSSupply is greater than demand at this priceMust adjust by lowering price to reach equilibriumPsupplySURPLUSdemandQD QtyS Qty
59 Price Floors Government sets minimum price Price can’t go lower 4/1/2017Price FloorsGovernment sets minimum pricePrice can’t go lowerCauses surplusMarket can’t adjustEx: Minimum wage causes surplus of workers at set price
60 SHORTAGE Demand is greater than supply at this price 4/1/2017SHORTAGEDemand is greater than supply at this priceMust adjust by increasing the priceSPSHORTAGEDQS QtyD Qty
61 Price Ceilings Government sets maximum price 4/1/2017Price CeilingsGovernment sets maximum pricePrice can’t go higherCauses shortageMarket can’t adjustEx: Rent controls, Price controls, Utility rates set by gov’t.
62 What else…………Inferior goods - is a good that decreases in demand when consumer income risesSuperior goods - make up a larger proportion of consumption as income rises, and therefore are a type of normal goodNormal goods - are any goods for which demand increases when income increases and falls when income decreases but price remains constant$ is not a productive resource – doesn’t producePpc – the originPpc – perfectly shiftable
63 ConclusionMarkets work best when supply and demand determine the price of goods/services or resources.When forces other than supply and demand determine the price of goods/services or resources, surpluses and shortages result.Over time, the forces of supply and demand undermine artificial price controlsEx. Black markets, ticket scalping, undocumented workers
64 Supply and Demand Curves 4/1/2017Supply and Demand CurvesTIME TO PRACTICE GRAPHS!Use blue graph review sheets – put in graphs # 1-3 (CFC, PPC & S & D)